We are mindful of the risks ahead: Our overweight positions in equities and commodities are small, we take a neutral duration in USD and GBP and no directional exposure in EUR/USD.

This year has been a tale of a generally good economy and fundamentals, but often depressed investor sentiment. Until year-end, plenty of important event risks remain that may well keep markets on their toes. The Italian budget debate and the implications it has for the Eurozone and the EUR is one risk. The trade conflict is another, with an extension of US tariffs, China’s response and the US mid-term elections key events ahead. In addition, further tightening by the US Federal Reserve and the impact of China’s recent economic stimulus package will set the tone for emerging market (EM) assets. At the same time, growth is solid in most developed markets (DM) and EM, labor markets and consumer confidence are the best they have been in a long time and companies, particularly US small and mid-caps, are on track for very good results. Thus we believe that investors should retain their core fundamentals-based investment strategy but be mindful of the risks.

Mind the risks: What to do in portfolios? To reflect our confidence in continued global growth, we keep to our pro-growth strategy focused on equities and commodities. Yet given the risks, our overweight positions in these asset classes are small in an otherwise well-diversified multi-asset portfolio. In USD and GBP, we take advantage of the recent rise in government bond yields to add back duration in bonds (i.e., we buy longer-dated core government bonds) to steer overall bond duration to neutral versus our benchmark. In currencies, we take no directional view on EUR/USD at the moment to avoid exposure given the risks. In equities, our overweight position now spans four sectors instead of three: We have added a preference for the defensive healthcare sector to our existing preference

For the cyclical IT, financials and energy sectors. Furthermore, we allocate a portion of our portfolios to specific hedging strategies that do not cost us much if our base case materializes but help stabilize portfolios in the event of another risk-off phase.

EM fundamentals much better than valuations suggest EM assets have had a tough 2018. Turkey and Argentina have been hit by the classic combination of rising US interest rates and a strong USD. Both countries run large current account deficits, which makes them vulnerable to capital outflows. South Africa and Indonesia are in the same camp. Yet most other EMs do not share these vulnerabilities. China was hit by worries over trade while the country was in the midst of a domestic deleveraging effort in H1, resulting in a significant sell-off in Chinese equities. However, Chinese authorities have been providing backstop economic stimulus, the positive effects of which will likely become tangible in Q3/Q4. We thus retain our positions in EM equities and bonds for now.

Convertibles, GBP/USD Among our other convictions, convertibles are one of the asset classes that is most resilient in various volatility regimes. We re- tain a positive view on them. The GBP is one of the cheapest DM currencies against the USD. Recent news that the UK and the Eurozone might move toward a “Blind Brexit,” i.e. a less de- tailed agreement of the UK’s future trade ties with the EU includ- ing a long transition period, could lead to further GBP strength- ening from the current undervalued levels.